We have had months of speculation, but the Chancellor has stopped short of making any radical changes to pensions in the Budget. However, today’s announcement did introduce a sea change in the tax incentives for retirement savings.
We are pleased to see that the ISA allowance will be increased to £20,000 (from the present £15,240) and a new Lifetime ISA has been introduced. This will be available to savers under 40, who can put in up to £4,000 per annum. The government will top this up by £1 for every £4 contributed (equivalent to tax relief at basic rate), and this can be withdrawn tax free after age 60, or earlier if used to buy a first home. The funds can be withdrawn tax free in other circumstances, but the government bonus (and any investment growth) will then have to be refunded and a charge may be levied. Government will consult on whether to allow funds withdrawn to be replaced to qualify for the bonus again.
For younger people who qualify, and who are not higher rate taxpayers, the Lifetime ISA could be more attractive than a conventional pension, at least for the first £4,000 of retirement savings. Pensions will continue to have a place for higher rate tax payers, people over 40 and for savings over the £4,000 limit. Tax relief on existing pension schemes will remain untouched: however if it proves successful the Lifetime ISA may be a first step to abolishing or severely restricting the current pensions regime. It certainly shows that the Chancellor is attracted to an ISA type system which limits the tax relief to basic rate. We wonder if in due course changes might be made to the auto enrolment rules to allow contributions to be made to a Lifetime ISA.
Other smaller changes that affect pensions are:
- Government will ensure the pensions industry designs, funds and launches a pensions dashboard – a digital interface where an individual can view all their retirement savings in one place – by 2019. This could also help Government in having access to more reliable statistics on what aggregate pension savings for one individual look like
- Employers will be able to provide up to £500 worth of pension advice free of tax and NIC (up from £150)
- Funds in pension schemes will not be subject to Inheritance tax on the member’s death
- Restructuring the provision of financial advice guidance and increasing funding